No matter how prepared you think you are for life's emergencies, unfortunately things happen that are beyond your control. Sometimes the emergencies are minor inconveniences and sometimes, they are big headaches that cost major dollars. Usually, emergencies that require a nice chunk of change are rare, but when they happen (and they do happen), they can wreak havoc on your finances.
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My plan of action to handle a financial emergency would be as follows:
- Emergency Fund. Having a fully funded emergency fund can save you from a lot of headaches and worry. It's easy and quick to access your money and usually without any fees. And the best part, you won't pay any interest since you are using your own money. I currently keep my emergency fund in a money market account at my local credit union.
- Irregular/Sinking Fund/Random Fund. The second line of defense against emergencies would be to hit this fund. This is the savings account I set aside to cover those irregular expenses such as auto insurance, auto repairs, home repairs and to cover those small emergencies that may pop up. Just like my emergency fund, this fund is kept at my local credit union but in a regular savings account.
- 401k. This certainly would not be my first place to go for money. Borrowing money from your retirement account affects the future growth of the account. Taking money out of the account now can result in a smaller retirement fund when you are ready to draw from the account. The other downside is that you are paying back the loan with after-tax dollars. If you were to leave the company, the money would be due in full or you will be subject to penalties and fees. The upside is that it is pretty easy to get a loan from your 401k and there is no credit check. You will also be paying interest to yourself and not to the bank.
- Family/Friends. I would hope I would be able to cover the emergency with the above 3 choices since borrowing from family and friends can cause a strain on your relationship. If you want to lose a friend or family member, borrow money from them or loan them money. I personally would probably skip to the next step before I would think about borrowing from family and friends.
- Bank/Credit Union Loan. Usually not an easy way to get money in a pinch. You'll have to have good to excellent credit for an unsecured loan. In addition, interest rates on these loans are usually in the double digits.
- Credit Card Cash Advance. This would be one of my last places to get cash in an emergency. The interest rates are astronomical and there are usually no grace periods.
- Title Pawn/Payday Loan. No comment other than to say that I would have to be a life or death situation before I would consider borrowing money from these guys.
So do you have a plan of action to get cash in an emergency?
One thing I think you may have left out (maybe just before 401K) would be pulling out contributing to your Roth IRA (if you have one) You can pull out anything you put in without penalty. While you can't put it back really... it can be useful in an emergency
I think I'd put borrowing from family or from Roth IRA principal before borrowing from my 401(k). Of course, you have to find family members willing to do the lending!
I would borrow from family before a lot of the other ones too. :) I know that people don't recommend it but I've done it before and it's worked out well. Just wouldn't want to make a habit out of it!